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Cognitive Bias and Risk Preferences Analysis of
Ponzi Scheme Investors
Maya Sari, Nugraha
Management Study Program
Universitas Pendidikan Indonesia
Abstract— The form of Ponzi scheme has evolved over many
years and continues to change shape.The interesting phenomenon
from such as Ponzi Scheme is that although many investors have
lost their money, as publicized in the mass media, the case still
continued until now. This study aims to gain an overview of
cognitive bias, and risk preference. Furthermore, the relations
between these factors and investment decisions of Ponzi Scheme
Investors are also examined. The cognitive bias studied includes
overconfidence, availability heuristic, and herding while the risk
preference parameter used is risk tolerance. The respondents
consisting of 115 Ponzi scheme investors, are taken using
purposive sampling method. The verification analysis used is
multiple linear regressions. The result shows that overconfidence,
availability, herding and risk preference are the main principal
basis in processing the information to make financial decisions.
Overconfidence, availability heuristic, herding, and risk
tolerance, have a positive and significance influence toward
investment decision. Among the four variables, Overconfidence is
the factor that has the greatest influence to the decision to invest
This study hopefully will help investors to be aware of the impact
of their own psychological factors in their investment decision.
Keywords : Overconfidence, Availability heuristic, Herding,
Risk Tolerance
I. BACKGROUND OF THE STUDY
Ponzi scheme or HYIP (High-Yield Yield Investment
Program) has evolved over many years and continues to
growth [1]. This investment usually promises a great return
but, in fact, it is not high returns obtained by investors and in
some cases; the investor loss all of their money. The
interesting phenomenon from such this investment is that
although many investors have lost their money, as publicized
in the mass media, the case still continued until now.
The study of behavioral finance allows cognitive
psychology to play a potentially important role in finance.
This approach offers a better explanation of relevant factors
that influence investment decision's Ponzi scheme than the
neoclassical economic approach [2]. Behavioral finance
approach is explained that people are not always rational in
taking financial decision as there are cognitive bias and
emotional factors [3].
The cognitive bias studied includes overconfidence,
availability heuristic, and herding. Overconfidence is a belief
that he has more abilities and knowledge than others.
Overconfident investors tend to perceive themselves to be
more competent, and thus are more willing to act against their
beliefs, leading to more investment [4].
Another belief factor that influence the investment
decision is availability heuristic which shows a tendency to
rely more on available information at the time of decision
making, which makes the decision making spontaneous and
tends to choose investment decisions that are familiar. The
availability bias has a positive significant impact on investors’
decision making because investors generally depend highly
on easily available information [5].
Herding is also a form of cognitive bias done by the
investors where they base their investment decision not by
considering the economic fundamental basis of assets at risk,
but, by looking at the actions of other investors in the same
circumstances or even. Investors who do not have the
information tend to show herding behavior, where they will
act reactive to the investment choices of the investors who are
considered to have the information [6].
Besides that irrationality which is attributed to the belief
can also occur due to individual preferences towards risk [7].
Risk tolerance is one of the parameters of risk preference,
which shows the level of investor tolerance to the risk of the
investment. Investor with a higher-risk tolerance will invest
more on a high-risk investment. Otherwise, investor with a
lower-risk tolerance will invest more on low-risk investment
[8],[9].
Advocates of behavioral finance have been able to
explain a number of cognitive bias and risk preference that
affect the investment decision. The findings from some
studies showed that overconfidence, availability bias, herding
and risk preference have significant impacts on the investors’
decision making [10] [11].
The main purpose of this research is to investigate how
the overconfidence, availability bias and herding and risk
preference could possibly affect the financial decision on
Ponzi Scheme. As there are limited studies about behavioral
finance in Indonesia, this study is expected to contribute
significantly to the development within this field.
1st Global Conference on Business, Management and Entreupreuneurship (GCBME-16 )Advances in Economics, Business and Management Research, volume 15
Copyright © 2016, the Authors. Published by Atlantis Press. This is an open access article under the CC BY-NC license (http://creativecommons.org/licenses/by-nc/4.0/).
134
II. LITERATURE REVIEW
Finance behavior point of view believes that
conventional financial theory ignores the way people make
their decision and how it differs from one and another. In this
approach, the investors are often considered irrational in
taking financial decision as there are cognitive bias and
emotional factors.
Overconfidence is a belief that someone has an over
average ability and knowledge [12]. Investor who has high
overconfidence intend to overestimate their knowledge and
underestimate risk which lead them to take the wrong position
in the transaction [13]. Overconfident investors will trade too
frequently, that is, the gains overconfident investors realize
through trade will be less than they anticipate and may not
even offset the costs of trading [14].
Heuristic means showing an effort to process
information quickly based on insufficient experience and
intuition. One of the heuristic factor in financial decision
making is availability. The availability heuristic refers to the
phenomenon of determining the likelihood of an event
according to the easiness of recalling similar instances. In
other words, the availability heuristic may be described as a
rule of thumb, which occurs when people estimate the
probability of an outcome based on how easy that outcome is
to imagine [15].
Availability heuristic shows a tendency to rely more on
available information at the time of decision making,which
made the decision making spontaneous and tends to choose
investment decisions that are familiar [16].
Herding is usually termed as the behavior of an investor
imitating the observed actions of others or the movements of
the market instead of following her own beliefs and
information [17]. The investor decision can influence another
investor’s decision in terms of selling, purchasing, selecting
stock, investment period and the volume of investment [18].
The hope of an investor to invest in is to get the maximum
expected return from the amount of funds invested. However,
to obtain the expected return, an investor faced with
uncertainty (risk), so take optimal investment decisions, both
factors must be considered together, because of the trade-off
between expected return and risk. Investors' risk preferences
will influence the choice of alternative decisions. Prospect
theory explains that investors tend to frame the choice of
investment decisions in the context of potential gains and
losses based on specific preferences [19]. Based on the
theory, investors have an irrationality tendency as they are
reluctant to risk profits to losses.
III. RESEARCH METHODS
This study was conducted to obtain empirical evidence
on the factors of cognitive biases and risk preferences that
affect the investment decisions. Descriptive research in this
study was conducted to identify factors, which become the
primary identifier of the cognitive biases owned by Ponzi
scheme investors and their risk preferences. While the
verification study was conducted to examine the
interrelationship between cognitive biases, risk preferences
and the decision to invest in Ponzi scheme. The verification
analysis will be conducted through multiple linear regression
analysis. In multiple linear regression analysis, there are three
criteria for goodness of fit, the t test, F test, and the
determination coefficient. Before the multiple linear
regression analysis , there was a classical assumption test of
multicollinearity test, heteroscedasticity, and autocorrelation.
The research method used is a survey explanatory. The
time horizon of this study is cross-sectional, a study in a
specific time period but performed on several subjects. The
equation of this model is
Investment decision = a + b1 overconfidence + b2
availability + b3herding + b4 risk
preference+e1 (1)
The population of the study was the Ponzi scheme
investors in Bandung, and the sampling technique used was
purposive random sampling. Samples in this study were
selected based on the 115 questionnaires returned by the
respondents and filled completely.
The data in this study was collected using a checklist
questionnaire / enclosed statement that was distributed via
email, and / or delivered directly to the respondents
IV. DATA ANALYSIS
The majority of Ponzi scheme investors in Bandung
were 52.2 percent male, while the remaining 47.8% were
women. Meanwhile, according to age, the majority of
respondents were 65.2% reproductive age or 41 years - 50
years, while the rests are less than 40 years (17.4%) and age
above 50 years (17.4%). In addition, 65.2% were married and
the remaining 34.8% have not / were not married. Based on
the level of education held by the respondents, the majority
were bachelor (S1) degree level (80.9%) and only 1.7% were
S2 educated. In addition, 65.2% were self-employed, while the
remaining 17.4% respectively were BUMN employee and
private employees who 82.6% had worked between five years
to 10 years while the remaining 17.4% have worked for more
than 10 years.
The amount of incomes received by the majority of
respondents were 47.8% less than Rp. 3 million per month,
and only 17.4% who earn more than Rp. 12 million per month
The majority of respondents, 82.6% had only an investment in
the form of Ponzi scheme alone while the rest, in addition to
having an investment Ponzi scheme, had other investments in
land and gold (17.4%). The majority of respondents, 82.6%
were promised to get higher rates of return 16%-20%. A total
of 52.2% got their benefit from the funds they invested. As for
the remaining 47.8,% got their benefit from the funds they
invested and from recruiting new investors. Based on the
amounts invested, the majority of respondents, 47.8% invested
Advances in Economics, Business and Management Research, volume 15
135
more than Rp. 10 million, while the rest is invested in varying
amounts. 52.2% invested within a period of one year to two
years while the remaining 47.8% only invest in a period of
less than.
The measurement results show the respondents over
confidence is high. It can be seen that the respondents
perception of expectations of success is expressed the highest
by the respondents while the lowest respondents rating is the
perception of the ability to provide investment advice. High
level of confidence in the form of overconfidence causes
investors tend to overestimate the knowledge, and
underestimate the risk. Findings related to the high level of
overconfidence among Ponzi investment in line with the
research which states that in the worst conditions
overconfident investors are victims of fake investments like
Ponzi scheme [20].
The availability heuristic among investor of the Ponzi
scheme investment is the high category. The high level of
confidence in the form of availability heuristic is mainly due
to the perception of respondents who Ponzi investments can
increase wealth quickly. Additionally, the availability heuristic
belief is high because the majority of respondents were first-
time investors in a Ponzi investment so that they have a
limited ability and experience that ultimately led investment
decision making to rely solely on the information available at
that time. This finding is in line with argument the heuristic
usually happens to someone when they face something for the
first-time [21].
Herding is one form of investor's irrational behavior
where they take their investment decisions by not considering
the economic fundamental basis of an asset at risk, but by
looking at the actions of other investors in the same
circumstances or even by following the market consensus.
Belief in the form of herding is also found in this study. In
fact, the results show herding beliefs are included in the high
category. Belief in the form of herding can be seen especially
from the high number of respondents who have a perception
that the decision to accept / reject made by friends / relations
affect their decision to invest. High level of herding,
indicating that the role of friends or family is relatively high
when considering the Ponzi investment decisions. This
condition is relevant to the findings of other studies in which
the majority of respondents investing Ponzi scheme because of
solicitation relation [22].
The measurement of Risk tolerance as one of the
parameters of risk preference showed in the high category. A
high level of the risk tolerance means that the acceptance of
risk is higher than investors with low risk tolerance. The
description of Risk Tolerance owned by Ponzi scheme
investor results showed that the majority of respondents have
a high level of acceptance of risk, or they are more receptive
to high-risk investments. It reflects that the majority of
investors are a risk taker. This finding is relevant with other
studies in which they are willing to invest at high risk because
the previous investment experience was profitable. [23].
The results of research related to the Ponzi scheme
investment decisions fall into the high category. The majority
of respondents agreed that the decision to invest in a Ponzi
provided high expected return. It was primarily because the
respondents gained the high return from their investment, as
promised, level of benefits exceeds the average return on
investment in general. Although the perceived level of
satisfaction is not optimal, it is due to the high rate of return is
felt only in the short term, hence forth they can no longer
enjoy such benefits because these benefits were terminated
unilaterally by the management. Another dissatisfaction factor
is that many investors, after enjoying the advantage for a
while, should lose all the funds invested. This condition is
relevant to the findings of other studies [24].
TABLE I. RELATION BETWEEN BIAS KOGNITIF, RISK
PREFERENCE AND INVESTMENT DECISION
Model Multiple linear regression analysis
Coeficient t-ratio P-Value
Cost 2.009 4.342 0.000
Overconfidence 0.174 2.215 0.029
Availability 0.171 3.382 0.001
Herding 0.081 2.013 0.047
Risk Preference 0.082 0.014 0.046
F-Value 76.748
Adj R2 0.736
Table I showed the relation between bias cognitive, risk
preference and investment decision. The test results showed
that simultaneously, Overconfidence, Availability, Herding,
and the risk tolerance have a significant influence on
Investment Decision (F=76,748, with a significance level of
0.000<0.05). Similarly, the partial test results showed that
Overconfidence, Availability, Herding, and risk tolerance had
partial influence on Investment Decision (sig <0.05). Among
the four variables, Overconfidence is the factor that has the
greatest influence to the decision to invest. The value of R
Square =0,736 illustrates that the contribution of
Overconfidence, Availability, Herding, and risk tolerance to
fluctuations in Investment Decision variable is equal to73.
60% and the remaining 26.40% are contributed by other
variables not included in the model proposed in the study. The
results of multiple linear regression analysis showed that
overconfidence, availability, herding and risk tolerance have
positive influence toward investment decisions. This condition
is relevant to the findings of other studies that the higher the
overconfidence, availability, herding, and risk preference, the
higher the investment decision [25], [26].
V. CONCLUSIONS AND SUGGESTIONS
This study aims to examine the influence of cognitive
biases and risk preference on investment decision using a
sample of 115 investors Ponzi Scheme. The results showed
that overconfidence, availability, herding and risk tolerance
have a positive and significant influence toward investment
decisions. The partial test results showed that overconfidence
Advances in Economics, Business and Management Research, volume 15
136
are the main factors that influence the decision to invest in
Ponzi scheme. This study hopefully will help investors to be aware the
impact their own psychological factors in their investment decision.
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